Japan Seen Anteing Up on Stimulus as Yen Impact Fades: Economy

Masaaki Shirakawa, governor of the Bank of Japan, repeated that monetary policy has only a limited role in ending deflation and supporting growth. Photographer: Andrew Harrer/Bloomberg

April 25 (Bloomberg) -- Japan’s central bank is set to ante
up on stimulus measures as a rebound in the yen shows that the
impact of a 10 trillion yen ($123 billion) expansion in asset
purchases in February is fading.

All 14 economists in a Bloomberg News survey predict
additional easing when the Bank of Japan releases new inflation
forecasts on April 27. Most expect an increase ranging from 5
trillion yen to 10 trillion yen.

One dynamic that may undermine stimulus efforts is Governor
Masaaki Shirakawa’s own comments, repeated in the U.S. last
week, that monetary policy has only a limited role in ending
deflation and supporting growth. Former Bank of Japan board
member Atsushi Mizuno says investors are confused on where the
central bank stands, while JPMorgan Chase & Co. says failing to
ease could see the yen strengthen further.

“The BOJ will have to clearly show powerful easing amid
high market expecations and elevated political pressure,” said
Hideo Kumano, chief economist at Dai-Ichi Life Research
Institute in Tokyo and a former official at the central bank.
“Otherwise, investors will be more confused and the view will
become more widespread that there is no change in the BOJ’s
passive stance.”

The yen traded at 81.41 per dollar in Tokyo as of 10:24
a.m. in Tokyo today after sinking to an 11-month low of 84.18 on
March 15. Yields for benchmark 10-year bonds fell to the lowest
since October 2010 this week on easing speculation.

Unpredictable Gorilla

A stronger yen reduces export sales and profits, weighing
on the nation’s recovery from last year’s tsunami, earthquake
and nuclear crisis. Nissan Motor Co. Chief Executive Officer
Carlos Ghosn said this week that the currency is the
unpredictable “one-thousand-pound gorilla” that makes all
Japanese car manufacturers suffer.

Eleven of the economists in the survey said they expect 5
or 10 trillion yen in extra asset-purchase money. Seven said the
bank won’t extend the maturity of the bonds it buys beyond the
current two-year maximum, while six disagreed.

JPMorgan said yesterday that the central bank may revise
its forecast for so-called core inflation for the 2013 fiscal
year to 0.6 percent from 0.5 percent, highlighting the case for
more easing by showing the gap with the 1 percent price goal.

The BOJ should bolster its monthly purchases of government
bonds by a fifth, double the inflation target, and commit to
monetary easing through 2014, mirroring a U.S. pledge to keep
interest rates near zero, former board member Nobuyuki Nakahara
said yesterday. The central bank currently buys 1.8 trillion yen
of government debt each month.

European Austerity

The Bank of Japan will meet as austerity measures in Europe
curtail demand for Asian exports. In the U.K., a report today
may show that the economy narrowly avoided returning to
recession in the first three months, defying the warnings of
some Bank of England policy makers.

Gross domestic product probably expanded 0.1 percent from
the fourth quarter of 2011, when it shrank 0.3 percent,
according to the median of 40 estimates in a Bloomberg News
survey. A recession is defined as two straight quarters of
contraction. The Office for National Statistics will publish the
data at 9:30 a.m. local time in London.

In the U.S., a report from the Commerce Department will
show a 1.7 percent decrease in March orders for durable goods,
according to the median forecast in a Bloomberg survey.

Fiscal Plans

During his U.S. trip, Shirakawa spoke in New York and
Washington. In one set of remarks, he said that Japan’s lack of
“concrete reform plans” for the nation’s finances may be
contributing to deflation and sluggish economic growth by
discouraging spending by the public.

In another, he said that central banks “cannot reasonably
deliver solutions to structural issues” and the key challenge
for Japan is rapidly changing demographics.

“Considering that the Japanese financial conditions are
probably the most expansionary among developed economies, the
failure of Japan to shake off modest deflation can mostly be
explained by its deteriorating growth potential,” the central
banker said.

At the same time, expectations for monetary stimulus have
risen since Shirakawa and his board members set the 1 percent
inflation goal in February and pledged “powerful monetary
easing” until that target is in sight.

Political pressure is elevated after the bank refrained
from adding stimulus at the past two meetings and lawmakers
blocked BNP Paribas SA economist Ryutaro Kono from joining the
BOJ board because he was seen as insufficiently aggressive on
easing, said economist Takehiro Sato.

‘Captive’ to Lawmakers

“Political pressure surrounding the BOJ is only
intensifying,” said Sato, chief Japan economist at Morgan
Stanley MUFG Securities Co. Lawmakers seem to be taking the bank
“captive” and the result may be increased easing for years,
the analyst said.

Japan faces the challenge of supporting growth without
adding to the nation’s fiscal burden. Prime Minister Yoshihiko
Noda is struggling to convince lawmakers to double a 5 percent
sale tax to contain the world’s largest public debt burden,
expected to exceed 1,000 trillion yen for the first time this
fiscal year.

Yoichi Kaneko, a lawmaker at the ruling Democratic Party of
Japan, said that while fiscal and monetary measures are both
tools for reviving the economy, “we are going to squeeze
spending,” leaving monetary policy as the only option.

Morgan Stanley MUFG said in a note yesterday that a policy
deal “may be brewing” for Noda to offer alterations to the law
governing the central bank in exchange for the opposition
Liberal Democratic Party supporting a tax increase.

Striking a Deal

One possibility would be linking the tenure of BOJ
leadership to progress in meeting an inflation goal, Morgan
Stanley MUFG said. It didn’t cite sources for the speculation.

The LDP, the biggest opposition party, wants an agreement
between the BOJ and the government for an inflation target of 2
percent, according to a policy outline released April 13.

Already, the central bank is “probably implementing
policies it doesn’t want to,” according to former board member
Mizuno, the managing director of Credit Suisse AG in Tokyo. The
central bank “announced measures that it doesn’t necessarily
think are effective” for ending deflation by expanding asset
buys and setting the 1 percent inflation goal, he said in an
interview on April 16.

Goldman Sachs Group Inc. economist Naohiko Baba previously
said that those moves in February were “out of character” for
Shirakawa, while JPMorgan described them as a “game changer”
that marked a new approach by the monetary authority.